Monday, December 15, 2008

Defeasement: Shake the Tree, Gather the Nuts

Chris Briem, one of Pittsburgh's foremost economists, throws a glass of cold water on the campfire that is becoming the Great Defeasement Debacle.


The current yield curve for government T Bills and bonds goes from 0-2.5% for maturities out to 10 years. For maturities out to 5 years the maxium yield is under 1.6%. At the low end, you can't really defease any debt these days. (Null Space)

So it appears that our Libertad, Egatitad, Defeasitad manifesto may not have been exactly the thing. We were conflating several issues, some of which being Pittsburgh's predilection to incur debt to pay off other debt, to over-speculate in the market, and to conduct plain old accounting gimmicks like these.

This may have been the most harmless example of its breed: a little accounting white lie. You would think that if Patrick Dowd chose to make a move here -- Shame on the mayor! Shame on the ICA! -- he would have done so supported by a ton of research and a certain degree of necessity. He may yet secure us our "clarity" as to how exactly these funds will be spent -- but he shook the hive pretty hard with little at stake, if in fact we can't profitably defease our bonds now even if we tried.

What was revealed were several artifices concerning our budget -- one being that our five-year outlook is "balanced" or "alright" in any real way. The best we can say is that the ICA approved it, and the ICA is after all only as much good as the State Legislature. (Do what you will with that.)


As Pittsburgh firefighters union chief Joe King left a news conference yesterday, he turned to Mayor Luke Ravenstahl and said, "If you hide money, I'm going to find it." (P-G, Rich Lord)

Well, that doesn't smell like Team Spirit!

Almost all of the unions representing city workers will get new contracts next year, and the two biggest -- the International Association of Fire Fighters and the Fraternal Order of Police -- can take the city to binding arbitration.

Even if Mayor Ravenstahl and the ICA are "hiding money" -- even if they are setting aside $35 million or so (??) and renaming it and writing it out of the budget (this is how you get into trouble, people!) -- do consider that we're all making sacrifices.

"We're not here to bankrupt the city with wages and benefits," [Fraternal Order of Police President Dan] O'Hara said. "However, there is a real concern about what this police force is going to look like if wages don't keep pace with other communities."

Unfortunately, other communities aren't in as bad a shape as we, are they? Think about what the Port Authority just went through. "We need to do more with less" is unfortunately a gross reality across the nation, much less Southwestern Pennsylvania, much less Pittsburgh.

I'm not yet saying we need to make cuts. I'm just saying we skip "binding arbitration" on the stuff to which we can come to an amicable accord.


Now, back to the actual economist. He was intrigued by the very notion of going to great lengths to set up this "lockbox" or "non-lockbox" to pay debt when it comes due:

First off, why was the plan shifted from paying down pension funds to paying down debt? There would be no issue at all right now if the surplus in question was put into the pension fund where it could not be extracted. The city's debt level has not changed from its planned trajectory in the last year, yet the pension fund has been hard hit by the financial markets. You would think that the pension fund is far more in need of shoring up right now. (ibid.)

Pause for effect.

I can only speculate the reasons for the shift, but suspect the mayor's budget reflects some of the preferences of the ICA.

Pause for effect.

Without rambling more, I think the whole issue comes down to some key legal questions that I addressed when musing on the ongoing bankruptcy proceedings in Vallejo California. If you want more see what I said in
Why Vallejo Matters.

Bankruptcy proceedings? If a city goes through with a bankruptcy, I suppose that would relieve it of the obligation of owing money both to its pensioners and creditors.

If the city pays off its creditors on Wall Street in advance and lets the pension fund suffer, one might have difficulty winning reelection. Several advancing columns of current and former employees would not be ideal. (Nonetheless, it may be a good time to buy some AFLAC.)

Yet if the city takes care of its pensioners first and lets its creditors suffer instead, one may find one's bankruptcy judge unwilling to grant one the bankruptcy. "Try raising taxes on all those people who are getting pensions", she'll say ... and that affects everybody and everything. Meanwhile, nobody on Wall Street is doing business with us anymore. A slow and painful death.

So can the former be what is being perpetrated upon us ... real quiet-like?

I've been calling for Bankruptcy for years now. This forum visits that subject periodically and the majority of contributors say "NO" it'll be the end of Pittsburgh.But now as the nation and the world slips into the grips of a serious recession or maybe even a depression, cities like Pittsburgh, already fiscally distressed, are on the edge of the abyss. File now; be first.


  1. The cops should get a raise.

  2. He's Matt Hogue, and he approves that message.

  3. If the City filesfor bankruptcy, does that affect our ability to get money for capital projects in the future? Actually, with the credit markets the way they are, do we want to run the risk of standing out as one city that won't pay back its debts?

    Wasn't there a meeting a few months ago with Dennis Yablonsky? Didn't he say the City was going to have to stay in Act 47 status? Has a new five year plan been written? Does it deal with pension and debt?

  4. Should it be Mayor Ravenjevich or Mayor Bagostahl?

  5. Ed -- New five year plan is due to be written by June, or perhaps (more likely) by March. As to do we want to "stand out", we already stand out for being screwed -- we can afford to stand out for taking the bull by the horns. Is the thinking.

    Anon 10:57 -- There is some particularly crude anonymous anti-Luke propaganda being disseminated on the BR comments right now, and that smacks of the same stuff. I'm not gonna come out against anti-Luke propaganda as such, but I gave up being crude oh, what was it, months and months ago. And I gave up anonymity all the way back when PittGirl switched to WordPress, which is arguably more important if you're going to be at all crude.

    My point is: do you know of a great new sweetheart deal? Until then, you're not impressing anybody.

  6. Does an entitiy that generates $20 million in annual surplus qualify for bankruptcy? If the city has tons of cash today. Shouldn't they invest for the future by either paying off debt or funding pensions rather than let it sit and be exhibit 1 in the fire fighters arbitration case? Why is this controversial?

  7. Anon - Debt can only be repaid when bonds come due; that's a big part of why this is so difficult. However, my impression is the pension fund can be contributed toward at any time; that's one reason why this is all a bit of a mystery.

    I'm pretty sure we're not projected to generate $20M in annual surpluses into the future.